Time to sell

In­vest­ment group Brait has been per­form­ing ex­cep­tion­ally well, and re­mains one of the most favoured shares on the JSE. How­ever, it’s mo­men­tum could slow quite soon.

Finweek English Edition - - MARKETPLACE - Editorial@fin­week.co.za has been rated as one of the top 5 tech­ni­cal an­a­lysts in South Africa. She has been a tech­ni­cal an­a­lyst for 10 years, work­ing for BJM, Noah Fi­nan­cial In­no­va­tion and for Stan­dard Bank as part of the Re­search Team in the Trea­sury Div

nvi­est­ment

group Brait, which is con­trolled by bil­lion­aire busi­ness­man Christo Wiese, has had a phe­nom­e­nal run, bed­ding down a string of suc­cess­ful ac­qui­si­tions since it sold its 37% stake in Pep­kor in 2014. Its share price is up nearly 10-fold over the past five years; its net as­set value (NAV) – a key bench­mark for in­vest­ment firms – is up 76.7% over the past fi­nan­cial year to R136.27.

Over the past three years, its NAV re­flects a com­pound an­nual growth rate (CAGR) of 72.3% a year (com­pared with a bench­mark of 15% a year). Its mar­ket cap­i­tal­i­sa­tion cur­rently sits at R81.4bn, its div­i­dend yield is at 0.4%, and it trades at a very cheap price-to-earn­ings ra­tio (P/E) of 2.01 times, ac­cord­ing to INET BFA data. Head­line earn­ings per share for the year to end March were down 8.5% to R41.41.

Brait’s in­vest­ment strat­egy in­volves ac­quir­ing stakes in size­able un­listed busi­nesses op­er­at­ing in the broad con­sumer sec­tor. Its re­cent ac­qui­si­tions in­clude an 89% share­hold­ing in UK fash­ion re­tailer New Look; a 78% in­ter­est in gym op­er­a­tor Vir­gin Ac­tive; and in­creas­ing its stake in Ice­land, a UK-based food re­tailer, from 19% to 57%. Its other ma­jor in­vest­ment is 91.1% of Premier Foods, whose brands in­clude Snowflake flour and Blue Rib­bon bread, while it also holds smaller stakes in glass pro­ducer Con­sol, Pri­me­dia and lo­cal wine ex­porter DGB. The stakes in Con­sol and Pri­me­dia, held through Brait’s pri­vate eq­uity fund Brait IV, have been ear­marked for sale, with Brait say­ing in Fe­bru­ary that it plans to off­load the stakes within two years, Busi­ness Day re­ported at the time.

Over the past fi­nan­cial year, high­lights in its in­vest­ment port­fo­lio in­clude grow­ing its New Look foot­print to 838 stores (2015: 809), which in­cludes its first six stand-alone menswear stores in the UK, as well as ex­pand­ing its num­ber of stores in China to 85, up from 19 in the pre­vi­ous fi­nan­cial year. Vir­gin Ac­tive has also been in­creas­ing its foot­print in South­ern Africa (in­clud­ing open­ing its first gym in Botswana), Europe and Asia Pa­cific, and grow­ing to­tal mem­ber­ship by 3% to 1.47m. It sees “enor­mous scope for its pre­mium, high-end fit­ness clubs” in Asia and plans to in­vest up to £150m over the next six years to open up to 20 clubs in Thai­land (up from the cur­rent three) and be­tween eight and 10 in Sin­ga­pore (cur­rently one), Brait said.

Brait re­mains one of the most favoured shares on the JSE for a num­ber of rea­sons: it has a di­verse rev­enue base, good fun­da­men­tals, an ex­cep­tional track record of cap­i­tal al­lo­ca­tion de­ci­sions and its re­cent trans­ac­tions have been well ex­e­cuted. But de­spite this, sen­ti­ment on the charts seems rather pas­sive – with up­side mo­men­tum looking to po­ten­tially cor­rect in the near term. Pos­si­ble sce­nario: En­coun­ter­ing ma­jor re­sis­tance at 17 400c/ share, Brait has been range­bound be­tween 17 400c/ share and 14 200c/share since Novem­ber 2015. With the three-week rel­a­tive strength in­dex (RSI) neg­a­tively di­verg­ing, sup­port at 14 200c/share could give in – po­ten­tially spurring the de­scend­ing phase of a top­pin­gout pat­tern, with first tar­get sit­u­ated at 11 000c/share. Al­ter­na­tive sce­nario: Up­side above 17 400c/share could see Brait ap­pre­ci­ate fur­ther to 20 600c/share in the short term. How­ever, it would re­main overex­tended. For those in­vestors who are looking to buy Brait for the long term, I would sug­gest not, and for those in­vestors who are heav­ily ex­posed – sell on ev­ery uptick.

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